Legal: Agreed in principle

When is a contract a contract, asks Robert Akenhead – is it when a notional agreement is agreed, or does it need to be more formal?

While the relevant principles for the limitation of actions in contractual and tortious claims are well settled, difficult issues frequently arise in the law of contribution and indemnity, as the recent case of RG Carter Building vs Kier Business Services illustrates. RG Carter had built a school science block to the design of Kier. Defects subsequently manifested, so the ultimate client, Lincolnshire council, brought arbitration proceedings. Negotiations began in late March 2015 and a settlement agreement was reached on 29 June 2015.

Two years later, RG Carter issued proceedings seeking a contribution from Kier to the cost of works after the settlement. Kier indicated it would be taking a limitation defence and the parties agreed for the question of whether the claim was time-barred to be tried as a preliminary issue. Because of the terms of a standstill agreement, that issue turned on whether the claim was in or out of time as of 28 April 2017.

“But what counts as an “agreement”? Is there an agreement for the purposes of section 10(4) only when all the ‘i’s are dotted and all the ‘t’s crossed, or does something less binding suffice?”

Section 1(4) of the Civil Liability (Contribution) Act 1978 provides that “a person who has made or agreed to make any payment in bona fide settlement or compromise of any claim made against him in respect of any damage […] shall be entitled to recover contribution in accordance with this section”. The issue before the judge was the interaction between this provision and section 10 of the Limitation Act 1980, which prescribed a two-year limitation period from the date on which the right to contribution “accrued”.

Section 10 of the 1980 act works by way of two mutually exclusive sub-sections: section 10(3), which provides that the right to contribution accrues on the date of judgement or award; and section 10(4), which provides that the right accrues on “the earliest date on which the amount to be paid by [the paying party] is agreed between him (or his representative) and the person (or each of the persons, as the case may be) to whom the payment is to be made”.

But what counts as an “agreement”? Is there an agreement for the purposes of section 10(4) only when all the “i”s are dotted and all the “t”s crossed, or does something less binding suffice?

Time matters

This mattered because, between late March and the execution of the settlement agreement between RG Carter and the council on 29 June 2015, the parties had been negotiating on a “subject to contract” basis with all the correspondence marked accordingly. If time only ran from the date of the concluded settlement agreement in June 2015, the claim was in time; if the parties’ agreement in principle that RG Carter would carry out some remedial works (even if uncertain in scope) in March or April 2015 was sufficient, then the claim was out of time.

The judge approached this problem by first concentrating on general contractual principles. Parties are free to agree not only the terms on which they will be bound, but also the time at which they will be bound. One scenario, therefore, is that parties may reach “an immediately binding agreement as to the settlement payment, but leave for later agreement details as to payment terms” (at [32]).

In such a case, even if the details are outstanding, then the parties’ agreement as to payment alone will be sufficient to start time running. Another scenario is summed up by an expression much used in connection with the current Brexit negotiations: “nothing is agreed until everything is agreed”. In that case, the parties would have decided only to be bound when all terms were agreed and time would not start running until such an agreement had been reached.

Amount to be paid

The steps taken by RG Carter and the council between March and June 2015 to put their negotiations on a “subject to contract” basis were effective and it was found that the nature of these negotiations was such that the parties had intended to put themselves in something like the second scenario. On this basis, the judge held that time only started running from the execution of the settlement agreement on 29 June 2015. It followed that the limitation defence failed.

The judge also approached the problem from a second avenue, being the words “the amount to be paid” in section 10(4) of the 1980 act. Assuming that an agreement in principle was sufficient to start time running, the judge still considered that the limitation defence would fail because the parties had not reached agreement on the “amount to be paid” until June 2015.

In summary, while it would be surprising advice that parties to settlement agreements model themselves on those negotiating the terms of Brexit, parties should identify at an early stage in settlement negotiations when and how agreement will be considered as reached, particularly where at least one of them might want to pursue a third party for a contribution.

Sir Robert Akenhead is an arbitrator, mediator, DRB member and adjudicator at Atkin Chambers. He was assisted in the writing of this article by Christopher Reid, a barrister at Atkin Chambers